Over the past few years, we have received a growing number of inquiries regarding the taxation of so-called virtual or cryptocurrencies from individuals who have purchased such currency and others who are mining the currency. Thus far, these issues have been analyzed under existing tax rules, with some guidance from the Internal Revenue Service (IRS). Recently, there has been a flurry of discussion regarding the IRS’s increased focus on the taxation of cryptocurrencies. Further, IRS representatives have indicated that the topic is front-of-mind. This article outlines some of the primary tax issues and reporting obligations posed by such cryptocurrencies.

What Is Cryptocurrency?

In 2014, the IRS first addressed the issue of virtual currency in a 2014 notice to taxpayers. In that notice, the IRS described virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value.” Notice 2014-21. At their core, virtual currencies are just the newest version of currency. Historically, precious metals were used as currency to purchase goods or services. However, they were difficult to carry and store. Most modern currency, on the other hand, is known as “fiat currency.” Fiat currency is generally issued by a government, which sets its value. The actual value of such currency can vary depending on the strength of the government and economy backing the currency.